While small-cap stocks, such as Polimex-Mostostal SA. (WSE:PXM) with its market cap of ZŁ922.81M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into PXM here.
How does PXM’s operating cash flow stack up against its debt?
PXM’s debt level has been constant at around ZŁ430.21M over the previous year – this includes both the current and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at ZŁ710.81M for investing into the business. Moreover, PXM has generated ZŁ105.22M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 24.46%, indicating that PXM’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PXM’s case, it is able to generate 0.24x cash from its debt capital.
Does PXM’s liquid assets cover its short-term commitments?
At the current liabilities level of ZŁ1.41B liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.14x. Generally, for Construction companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does PXM face the risk of succumbing to its debt-load?
With debt reaching 51.12% of equity, PXM may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In PXM’s case, the ratio of 1.93x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as PXM’s low interest coverage already puts the company at higher risk of default.Next Steps:
PXM’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how PXM has been performing in the past. I recommend you continue to research Polimex-Mostostal to get a more holistic view of the stock by looking at:
- 1. Historical Performance: What has PXM’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 2. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.